ALCHEMIST ISSUE SIXTY SIX

Kazakhstan’s Gold Mining

Sector and the New Regulation
on Gold Sales
By Michael E. Wilson, Director, and Elena Lee, Senior Lawyer, Michael Wilson & Partners Limited

In their article, Michael Wilson and Elena Lee review current gold Kazakhmys plc (which is a FTSE 100 company)
is the main copper producer in Kazakhstan,
production in Kazakhstan and consider how new regulations are with a Boliden built refinery at Balkhash in
impacting on domestic production capacities and gold sales. Their Central Kazakhstan. Gold production from
Kazakhmys Copper was 138,400 oz, grading
conclusion is that they expect, at least for the foreseeable future, 0.73 g/t in 2010, whilst Kazakhmys Gold
that Kazakhstan will refine all the gold it produces and also that the produced 1,401,000 tonnes of ore, grading
National Bank will exercise the State’s priority to purchase all gold 1.25 g/t in 2010, and Gold doré production
reached 43,100 oz in 20105. It is rumoured
bullion produced in the country. that Kazakhmys also wishes to sell its
gold assets.
Kazakhstan currently ranks ninth in the world The total gold resources are estimated at 9,200
(third in CIS,1 after Russia and Uzbekistan) in tonnes, whilst reserves are at 2,200 tonnes. The major gold deposits are located in the
terms of gold reserves and 25th (third in the At current production rates, these will last North, East and Central Kazakhstan, and are
CIS) in terms of gold production. According to approximately 19 to 80 years. shown on the map below and on page 13.
the Ministry of Industry and New Technologies
of Kazakhstan (MINT), the competent body, gold The majority of Kazakhstan’s gold production The largest of Kazakhstan’s open-pit gold
production was 36.6 tonnes in 2011, a 21.1% comes from the processing of polymetallic and deposits is the world-class Vasilkovskoye
increase over 2010, including 16.6 tonnes2 of copper ores. (near Kokshetau), which has been explored
refined gold. since the Soviet times and which was sought
KazZinc (the only LBMA accredited refinery) by all of Dominion Mining, Placer Dome,
There is an ambitious plan to increase gold is the largest gold producer in Kazakhstan, as Barrick, LonMin, Resolute, Malaysian Mining,
production to 70 tonnes per annum by 2015. a by-product of processing polymetallic ores. Teck-Cominco, Levayev and Gaydamak, but
Kazakhstan has 293 gold deposits (38% KazZinc’s gold production was 348,000 oz in is now owned and operated by Altyntau
gold-complex, 60% gold proper, 2% placer), 2010 and 429,000 oz in 20114, which included Resources JSC, an affiliate of JSC KazZinc
but only 149 are licensed or in commercial production from the Vasilkovskoye open pit. (itself now part of Glencore International
development.3 It is rumoured that KazZinc will shortly sell its Plc). A gold recovery plant of 8 mtpa was
gold assets. commissioned in May 2010.

Developed deposits
Vasilkovskoye
Explored deposits Uzboi
Russia Varvarinskoye Bestobe
Komarovskoye Aksu Maikain
Zholymbet
Sekisovskoye
Suzdalskoye
Akzhal
Kazakhstan Bakyrchik
Kaskabulak
Akbokai
Dalabai
Altyntas
China

Uzbekistan Kyrgyzstan
Figure 1. Major and perspective gold deposits in Kazakhstan

1 http://www.akorda.kz
2. http://www.comprom.kz
3. According to Tau-Ken Samruk, which is the national holding
company established in January 2009 at the initiative of
the President of Kazakhstan, Nursultan Nazarbayev, to hold
the Kazakh Government’s stakes in some of the country’s
largest metals and mining companies. Tau-Ken Samruk is a 5. Source: the corporate website of Kazakhmys plc, http://
subsidiary of the Samruk-Kazyna National Wealth Fund. In www.kazakhmys.com
late 2009, Tau-Ken Samruk created a subsidiary, Tau-Ken
Altyn LLP, for the exploration, development, treatment and
refining of gold and silver.
4. http://www.kazzinc.com

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The Bakyrchik deposit, now part of the Kyzyl began in December 2007, after the first project
Project, which also includes Bolshevik (Ust- financing was raised for the gold sector from
Kamenogorsk, East Kazakhstan) is perhaps Investec, Nedbank and the South-African Export
the largest in Kazakhstan, with some claiming Credit Agency. By 2013, Polymetal intends to
it may have 20-30m ounces. Bakyrchik is now increase gold production to 5 tonnes per year6.
owned by Altynalmas Gold Ltd. (which is owned Hambledon Mining plc (listed on AiM) owns the
by Ivanhoe Mines and nominees of the Almex Sekisovskoye deposit near Ust Kamenogorsk,
Group on a 50/50 basis). East Kazakhstan. Underground mining began in
late 2011. Hambledon contracted to purchase
Akmola Gold LLP (the former Teck-Cominco
“
Company), which owns the Tellur and Stepok
deposits, in September 2011, and hopes to
Kazakhstan’s largest complete the purchase shortly. Hambledon now
historical independent gold has EBRD as an investor.
producer since 1929 has
Central Asia Resources Limited (listed on the
been the former State-owned ASX) has five prospects in Kazakhstan (i.e.
Kazakhaltyn, which was Dalabai, Altyntas, Bizhe, Kepken and Kengir)
with a total resource of 1.28m oz of gold.
bankrupted and privatised Altynalmas JSC is the former national
in 2003. It is located at
Stepnogorsk, north of Astana
and has three mines at Aksu,
“ company, which after independence operated
and managed all of the various gold mines
and exploration areas (as the successor to
KazZoloto, itself part of GlavAlmazZoloto). After
Bestobe and Zholymbet. Bakyrchik and Vasilkovskoye were taken away
from it under the Kazhegeldin Government, it
was left with the Akbakai Underground Gold
Mine in the Zhambyl Oblast. It also acquired the
Kazakhstan’s largest historical independent nearby Svetinskoye, Beskempir and Kareera
gold producer since 1929 has been the deposits. The Akbakai gold processing plant
former State-owned Kazakhaltyn, which was was upgraded in July 2011, utilising a US$50m
bankrupted and privatised in 2003. It is located facility from Eurasian Bank JSC, pursuant to the
at Stepnogorsk, north of Astana and has three Government’s Programme for the Industrial-
mines at Aksu, Bestobe and Zholymbet. MMC Innovative Development of Kazakhstan for
Kazakhaltyn JSC was acquired by Polyus Gold 2010-2014.
OJSC when it took control of KazakhGold Plc
from the Kazakh Assaubayev Family in August Impact of the Customs Union on Gold
2009. Current production is 95-100,000 oz per Sales in Kazakhstan
year from underground, open-pit and tailings. Between the period of July 1998, i.e. when the
Polymetal OJSC (Nesis) bought the Presidential Decree ‘On State Regulation of
Varvarinskoye gold deposit (130 km from Relations Connected with Precious Metals and
Kostanai) in 2009 from Orsu Metals Precious Stones’ of 20 July 1995 that had the
Corporation. Gold production at Varvarinskoye force of a law was abolished, and 1 January
Location Gold Deposits
North Kazakhstan Vasilkovskoye, Varvarinskoye, Uzboi, Symbat,
Komarovskoye, Elevatornoye, Akkarginskoye,
Zhetygorinskoye
Central Kazakhstan Aksu, Zholymbet, Bestobe, Maikain, Kvartsytovye Gorki,
Ushoky, Yenbekshi, Pustynnoye
East Kazakhstan Bakyrchik, Suzdalskoye, Sekosovskoye, Bolshevik,
Vasiliyevskoye, Ridder-Sokolnoye, Zhanan, Akzhal,
Kaskabulak
South Kazakhstan Akbakai, Altyntas, Ddlabai, Aksakal-Beskempir, Mynaral,
Zharkulak, Karamurun, Arkharly, Kumysty
West Kazakhstan Yubelienoye
6. Source: http://www.newskaz.ru/economy/20100317/490895.html
ALCHEMIST ISSUE SIXTY SIX
2010, there was no regulation of gold sales
and exports in Kazakhstan, domestic sales
attracted VAT at the standard rate (now 12%),
whereas export sales were zero-rated, and local
refining at Ust-Kamenogorsk (LBMA accredited)
or Kazakhmys’ Balkhash refinery also bore VAT
and was relatively expensive. There was little
domestic market demand for gold; although
since independence, the National Bank of
the Republic of Kazakhstan (NBK) has been a
regular purchaser (see below).
Unlike India, the Kazakhs have not, historically,
been large believers in and consumers of gold,
and gold does not have the same place in
society, where reverence is still paid to the US
dollar and cash is king.
Producers typically chose to export their
concentrates or doré for final refining and sale,
and then seek to claim a refund for their excess
VAT inputs.
This began to change with the Customs Union
of Russia, Kazakhstan and Belarus (CU) from 1
January 2010.
The CU countries adopted a package of
regulations relating to the operation of the CU,
which included a special resolution on common
non-tariff regulation, introduced a single
list of goods, the import of which to non-CU
countries and the export of which from the CU
to non-CU countries are subject to prohibitions
and restrictions. Such goods include precious
metals, such as gold, silver, platinum and
platinum-group metals.
The application of the CU regulations on
precious metals was postponed in Kazakhstan
until 1 July 2011, and certain new regulations
became effective only from January 2012.
Regulatory Novelties
To implement the CU restrictions, in July 2011,
the President signed a Decree, introducing non-
tariff regulation of precious metals, specifically:
(i) State control over the import from non-CU
countries, and the export to such countries
of gold and raw materials containing gold,
to create incentives for the development of
the domestic gold market and processing
of gold in Kazakhstan, Russia and Belarus;
and
(ii) A priority right of the State to purchase gold
bullion designated for export, in order to
increase the gold reserves of the NBK.
Export of Gold and Raw Materials
Containing Gold
In August 2011, the Government adopted rules
as to the export/import of gold (in all forms) to
and from Kazakhstan, and to and from non-CU
countries, as well as raw materials containing
gold.
Currently, in order to export gold and raw
materials containing gold to non-CU countries,
an export licence should be obtained from the
Industry Committee within MINT.
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ALCHEMIST ISSUE SIXTY SIX
An exporter of precious metals can only be
a legal entity or individual entrepreneur: (i)
which is registered in Kazakhstan; (ii) owns
precious metals or has entered into an
agency agreement with the owner of precious
metals; and (iii) which is entitled to engage
in transactions with precious metals, in
accordance with the legislation of Kazakhstan.
In addition, an exporter must be on a special
registry of MINT.
The export of raw materials containing gold
to non-CU countries is permitted only for the
purpose of export or refining.
In order to increase utilisation of the existing
refinery capacity (the LBMA accredited refinery
of KazZinc/Glencore at Ust-Kamenogorsk
and the Balkhash Refinery of Kazakhmys),
an exporter of raw materials containing gold
outside of the CU should, prior to exporting,
obtain consent from MINT in the form of either
an export opinion (for export) or refining opinion
(for refining) that in Kazakhstan the commercial
recovery of gold from raw materials or refining,
respectively, is impossible or uneconomic.
In order to obtain such an export or refining
opinion, an exporter needs to make a filing
with MINT. When issuing an export or refining
opinion, MINT should consider the terms of
the export contracts and applicable prices for
refining provided by Kazakhstani refineries.
“
If MINT comes to the
conclusion that it is economically
feasible to commercially recover
gold from raw materials, and
that there is capacity for the
refining of the raw materials
in Kazakhstan, it will issue an
export/refining opinion that
such raw materials may not be
“ the NBK to waive the exercise of its priority right
exported from Kazakhstan.
If MINT comes to the conclusion that it is
economically feasible to commercially recover
gold from raw materials, and that there is
capacity for the refining of the raw materials
in Kazakhstan, it will issue an export/refining
opinion that such raw materials may not
be exported from Kazakhstan. An exporter
may appeal the export/refining opinion in a
Kazakhstan court.
As noted, currently, KazZinc (part of Glencore
International Plc) is the only company that can
comply with the London Good Delivery LBMA
international standard. Kazakhmys LLP also has
refining capacities to produce gold bullions at its
Balkhash Refinery, but only in accordance with
Kazakhstani (GOST) standards. However, the
NBK and the Government intend to encourage
7. For more information please refer to the NBK’s website: www.nationalbank.kz
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and cause the upgrade of Kazakhmys’ refining
capacities so that, within a few years, it will be
the second certified enterprise that can produce
gold in accordance with the London Good
Delivery LBMA international standards. There
has also been much talk of the Government/
MINT sponsoring, and of Samruk financing, a
new refinery.
The current tariffs for refining at Ust
Kamenogorsk vary from US$0.22 to US$0.23
per gramme (100% advance payment), plus
transportation and other costs (insurance) at
US$0.0195 per gramme.
The Balkhash refinery tariffs for refining of
doré to 99.9% gold are US$0.1 per gramme,
excluding VAT.
The current political and commercial intent is
to fully utilise the existing domestic refinery
capacity, and if that is achieved, at current
production rates, it should be possible for the
foreseeable future for Kazakhstan to refine all
of the gold that it produces.
This is not resource nationalism, but
economic and commercial common sense,
in that Kazakhstan had refineries that were
underutilised, even though domestic costs are
relatively low, and reflects Kazakhstan’s push to
move further downstream in the value chain.
The State’s Priority Right to Purchase
Gold Bullion
The State has a priority right to purchase gold
bullion and other precious metals that are
produced by subsoil users.
In order to export gold bullion from Kazakhstan
to non-CU countries, an exporter should,
therefore, apply for and obtain, apart from an
export licence, as noted above, a decision of
to purchase gold bullion. NBK has been vested
with powers: (i) to decide on behalf of the State
whether or not to exercise the State’s priority
right to purchase gold designated for export,
which became effective from 8 January 2012;
(ii) to control export transactions of second-
tier banks (i.e. any bank below the NBK) with
gold bullion; and (iii) to control the testing and
sampling of alloys of gold and raw materials
containing gold, which are exported/imported
from or into Kazakhstan.
As a practical matter, firstly, suppliers submit
to the NBK their forecasts for production and
sales twice per year, for the first and second six
months of a year.
Based on the forecasts for production,
the situation in the monetary market and
international financial market conditions, the
NBK either approves the limit for the purchase
of gold bullion through the exercise of the
State’s priority right for the coming six months
or waives the priority right for the coming period,
i.e. from one month to six months.
The NBK then determines the volume of gold
bullion to be purchased from a particular
supplier within the approved six-month limit of
gold bullion purchases.
If the NBK decides to exercise the State’s
priority right, the NBK and the supplier enter
into an agreement as to the terms of the sale
and purchase of gold bullion, as well as sign
a trade ticket (i.e. a contract passport) for a
particular lot.
“
In August 2011, the
NBK stated that it intends
to exercise the State’s priority
right to purchase all gold
bullion, so that domestic
producers who comply either
with London Good Delivery
“
or Kazakh standards will
have a guaranteed customer
of their products in the next
few years8
The price of gold bullion offered for sale, and
to be purchased by the NBK, should be set out
in the local currency, tenge (KZT). The price
depends on the weighted-average currency
rate of the KZT to the US dollar as of the date
preceding the transaction, as well as the
average value of the morning and evening
fixings of gold at the LBMA, averaged for the
whole month of the delivery and with the
discount to be calculated taking into account
the following:
• Transportation and customs costs,
as compared to the export of gold to
international markets;
• Expenses as to the sterilisation of monetary
overhang in the system;
• The bid offer spread; and
• A discount for quality of gold bullions
that do not comply with the London Good
Delivery standard.
It is not yet clear what is meant by the use of
the phrase ‘sterilisation of monetary overhang’
and what amount of expenses associated with
such will be included in the discount. In order to
support domestic local gold producers, the NBK,
together with the Association of Mining and
Metallurgical Companies, is considering possible
advance payment schemes.
The waiver of the State’s priority right may be
issued by the NBK if it reaches its limit for the
purchase of gold bullion or whenever it decides
to waive the State’s priority right for a certain
period (i.e. from one month to six months), and
the relevant decision should be published on
the NBK’s website.

Role of the NBK on the Gold Market
The NBK is the central bank of Kazakhstan
that is separate from the Government as the
executive branch and reports to the President
of Kazakhstan. The Chairman of the NBK
(currently, Gregory Marchenko) is appointed by
Decree of the President.
The NBK has been steadily accumulating
gold and other precious metal assets as the
following table shows7:
Year Precious Metals
2007 US$1.812bn
2008 US$2.001bn
2009 US$2.501bn
2010 US$3.052bn
2011 US$4.151bn
1 March 2012 US$5.281bn
In August 2011, the NBK stated that it intends
to exercise the State’s priority right to purchase
all gold bullion, so that domestic producers
who comply either with London Good Delivery
or Kazakh standards will have a guaranteed
customer of their products in the next few
years8. On 15 March 2012, the Chairman of the
NBK9 was quoted as saying that the NBK began
exercising the priority right from November
2011 and, as a result, has already purchased
around 20 tonnes of gold. This means that
within the next two to three years, no gold
bullion will likely be exported from Kazakhstan.
Kazakhstan also has a National Oil Fund, which
was created in 2000 as a stabilisation fund that
is intended to accumulate windfall revenues
8. NBK Pres Release No26 0f 2.3 August 2011
9. Online Conference on www.profinance.kz held on 15 March 2012
from oil sales and to seek to ensure the
economy will be stable against the price swings
of oil. The assets of the National Oil Fund
are monitored by the NBK. As of 1 February
2012, the assets of the National Oil Fund were
US$45.5 billion.
New VAT Regime on Gold Sales
Historically, VAT was charged on domestic
transactions in gold, but this was changed with
effect from 1 January 2012.
Sales by gold producers of refined gold from raw
materials of their own production to the NBK
are now taxed at a zero rate of VAT, whilst sales
to a buyer, other than the NBK, are exempt
from VAT, provided that such gold is sold within
Kazakhstan.
Conclusion
Raw materials containing gold can now
be exported only for the purposes of export
and refining, and only on the basis of a special
opinion from MINT. Kazakhstan is taking all
measures to upgrade and ensure the full
utilisation of the existing refinery capacity at
KazZinc and Kazakhmys, and if this is achieved,
it is likely to result in Kazakhstan refining all of
the gold it produces within the country for the
foreseeable future.
Compliance with the procedure for the exercise
of the State’s priority right to purchase gold
bullion will make the export of gold bullion a
complex and lengthy process, if not almost
impossible, at least within the next two to three
years, and this is especially so considering the
intention of the NBK to exercise the State’s
priority right to purchase all gold bullion
produced in Kazakhstan for the next few years.
However, in general, these changes are positive
and, particularly, the amendments to the Tax
Code as to the elimination of tax barriers on
trades with gold bullion within the country
should help motivate domestic gold producers
to further develop their production and the gold
market in Kazakhstan.
ALCHEMIST ISSUE SIXTY SIX
Michael E Wilson,
Director, Michael Wilson
& Partners, Ltd.
Prior to MWP, Michael was
the founding partner of all of
Baker & McKenzie’s offices
and its entire practice in
Central Asia, and the Caucusus. He has more
than 13 years of experience in London and
Sydney, and has now practised in Central Asia,
the Caucusus, Russia and the Ukraine for more
than 17 years. He specialises in mergers and
acquisitions, especially in the mining, and oil
and gas sectors, as well as corporate, joint
ventures, banking and project financing.
He has structured, documented and advised on
almost all of the major mining, oil and gas and
natural resource transactions in Kazakhstan,
Uzbekistan and the Central Asian Region
to date, including Sukhoi Log, Lenzolotto,
Aksu, Bestobe, Zholymbet, the Bakyrchik,
Vasilkovskoye, Varvarinskoye, Zarmitan,
Kumtor, Jeeroy, Taldy-Bulak, Amantaytau and
Dagystau Goldfields Projects, and also further
afield, namely the Mt. Morgan Gold Mine in
Queensland, the Vatukoula Mine in Fiji, to name
but a few. He is a Member of the Major Projects
Association; Founding Member of the Business
Lawyers Association of Kazakhstan; a Founding
Member of the Foreign Investors Council under
the President of the Republic of Kazakhstan,
a Founder and the former Treasurer and
Chairman of the European Business Association
of Kazakhstan (1998 to 2004); Member
of the American Chamber of Commerce in
Kazakhstan.
Elena Lee, Senior Lawyer,
Michael Wilson
& Partners, Ltd.
Elena belongs to the MWP
Banking & Finance Group
that works extensively with
financing and securities,
project financing, credit financing and loans,
mergers & acquisitions, and issues related to
Islamic banking. Elena specialises in Capital
Markets, Banking and Finance, Corporate,
Project and Corporate Finance, and Currency
Issues. Her legal expertise in the sector lies
in Mining, Energy and Commodities Trading,
Commodity Derivatives and Metal Trading
Activities, securitisation opportunities and
potential leasing structures for rolling stock,
various derivative products. She qualified as a
lawyer in, and has been practicing since 2004,
and subsequently won a scholarship, and
obtained a Cum Laude Master’s Degree (LL.M)
in International Business Law from the Tilburg
University, Netherlands in 2009, for outstanding
academic performance.
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